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Denis and Evgeny Fedorov: Power industry was our father’s choice for us

The case of Denis (on the left) and Evgeny Fedorov is unique in Russian power industry. The brothers started their career at the same time and have headed two largest Russian energy companies, an almost state-owned and a private one. Denis Fedorov has led Gazprom Energoholding since 2009. Evgeny has been the head of EuroSibEnergo and the major asset of Irkutskenergo since 2010. The Fedorov brothers told about their way to business, advantages and disadvantages of working for private and almost government institutions, as well as about their companies’ prospects with SERGEY ISPOLATOV, RBC Daily’s special correspondent.

HOW IT STARTED

— Was power industry a conscious choice for both of you?

D.F.: No. It was our father’s choice, including the institute and postgraduate education. This is why it was practically nothing to change. More exactly, we had no chance to do it. We might have some wishes, but they were suppressed. Our father is a power engineer and a Doctor of Engineering. He has specialized in thermal physics and worked at a plant in Kaluga his whole life (except for the last 15 years). The last 15 years, he owns a research company which conducts development activities in the spheres of thermal physics, hydrodynamics and hydroacoustics.

— You have graduated from the same school and the same institute. Have you started working together as well?

E.F.: Yes. We started working together at RAO UES of Russia, at a small department of OAO Scientific Research Institute of Energy Structures (NIIES), the UES Energy Efficiency Center, a small subsidiary situated in the north of Moscow near the Shchukinskaya metro station. We had worked there for a year when we were postgraduate students. Then it was time to defend our dissertations. After we defended them, our father suddenly stopped controlling our lives. Both of us became independent. I have found a Careers section on the website of RUSAL and just sent my CV. I was invited for an interview two weeks later and started working a month after defending my dissertation.

D.F.: There was a small group of lads at the Energy Efficiency Center, and we sometimes drank beer together after work. After some time, one of my mates said that he had a new job at EuroSibEnergo-Engineering and invited me there. It was very convenient. As postgraduate students, we lived at a campus at Aviamotornaya metro station, and the office was at Baumanskaya. I needed to travel three tram stops to arrive for work. I started working for EuroSibEnergo-Engineering just after my pre-defense and stayed there for about three years. At some time all senior managers left the company, the team changed, and I also decided to leave. Fortunately, another job was offered to me. However, I did not work for a new company for a long time; it was about one and a half or two months. Soon after I started working, I was invited for an interview to Kirill Seleznev, the head of Mezhregiongaz (now it is OOO Gazprom mezhregiongaz). He told me that Gazprom was considering a new idea of energy division and that the Gas and Liquid Hydrocarbons Marketing and Processing Department headed by him would be responsible for this. K.Seleznev suggested that I should try to work at Gazprom mezhregiongaz as his adviser. And then as luck would have it. As a result, I succeeded in it. Five successful years have already passed. (Smiling)

STATE-OWNED OR PRIVATE COMPANY

— Do you discuss the difference between managing a private and a state-owned company among yourselves? What is more difficult and why?

E.F. It depends on the period. It is clear that working for a state-owned company is somewhat easier because you can always be backed by “big and strong” Gazprom which will always support you whatever happens. From this point of view, it is easier to work, of course. But on the other hand it may be more difficult. In my opinion, I would not start working for a state-owned company now, because the majority of policy decisions contradicts economic logic to a certain degree. If you accustom yourself to it and work for a state-owned company for a year or two, then this will probably become something usual and normal for you. But sometimes it may be surprising and annoying.

D.F.: One cannot say that Gazprom Energoholding is a purely state-owned company. To be honest, I cannot remember any policy decisions or decisions that would contradict economic logic during my work. It is only due to our own cash flow that we live and survive. Gazprom will provide additional cash for us only this year. It will be the first time in the five years during which we have managed power industry. This is why our principles and mechanisms are similar to those of private companies. However, there was absolutely no significant dividend distribution during these five years, and it is clear that there will probably be nothing of the kind during the next two or three years. Nevertheless, our work is guided by market principles only. We are planning to enter the initial public offering (IPO) and preparing the company for this now. Of course, Gazprom will make the final decision. This is the first year when we are issuing the consolidated statements on power industry under IFRS. It is true that we cooperate with government agencies to a larger degree or spend much time at meetings of various ministries and authorities.

But of course there are some projects that would hardly be financed by private investors. Nevertheless, they are necessary for implementing large infrastructure projects, such as Adlerskaya TPP constructed by us. I think that probably no private investor would be able to finance the construction of such facility. Now we see that this is one of the facilities whose construction is scheduled and is to be finished by the Olympiad. And even in spite of this we always have problems, either with the mains or with sewerage. Meanwhile, the facility is constructed using the project financing mechanism which is usual for all private investors. This is why it is wrong to say that we use other management mechanisms. But to my mind, we undoubtedly have a great social responsibility towards people. I do not know how it can be compared to Irkutskenergo, but we could not “cut” the salaries of our employees as some of our colleagues did during the crisis. Social responsibility is one of our key principles.

— Evgeny, what do you feel about RUSAL?

E.F.: RUSAL is the key electricity buyer of our company now. As for management, these are separately managed companies with different shareholders’ structures. Both companies obviously have the same controlling shareholder who can make a final decision. Relations with RUSAL, as probably with any other heavy buyer, have some specific features. Boards of Directors have made the decisions that each party liked or disliked. There is always someone who takes offence and someone who is satisfied with the decision. But these things do not “cross” actually. In terms of management, it is an absolutely separate business. When I worked for RUSAL, EuroSibEnergo annoyed me because it seemed to us that all disputes were resolved through shareholders for the benefit of certain people there. Now I work for EuroSib, and I am slightly annoyed by the fact that RUSAL is the favourite asset of Oleg Vladimirovich (Deripaska – RBC Daily), and therefore some disputes are resolved for the benefit of metallurgists.

— Don’t you feel that you can be backed in case of emergency?

E.F.: Of course, there is something that you can address if the situation is critical and your own competence and limit of responsibility are not sufficient for solving the problem. But I feel absolutely comfortable. I would not say that state-owned companies are better backed up. For there is a person who makes all final decisions and is responsible for the whole business. It is clear that the state is a more amorphous thing and responsibility is blurred.

— Do you ask each other’s advice in terms of business?

D.F.: Practically no. In 90% cases, we meet in Kaluga when we visit our father. There we discuss common issues, our opinion on shifts, statements, these or that decisions which can change conditions of the companies’ existence. But our pricing zones and businesses are different. I do not understand clearly what the second pricing zone (Siberia) is. There is a SDPP in Krasnoyarsk, but it does not influence the market in general. I do not know the principles and the way the second pricing zone functions very well. It is actually an ordinary discussion of common issues. And there are also some ambiguous and uncertain decisions, no more.

E.F.: In general, we periodically exchange personnel. In most cases, our employees leave for Gazprom-Energoholding. And few people come to us from Gazprom because the employees do not usually leave it themselves.

— Have you and your brother ever thought about starting your own family business?

D.F.: No, never. We had a really interesting situation: father had tightly controlled us until we defended our dissertations and then said: “Thank you, that’s all. During these 20 years, we have become sick and tired of each other, so everyone should work separately. We’ll meet once a week”.

HOBBIES

— Do you have much free time left?

D.F.: Working for Gazprom, this year for the first time I managed to have a two weeks' vacation. We have got used to active life, and during the vacation you start to feel the lack of something. Sometimes we meet and spend our leisure time together. We have had a good company for a long time since we worked at the Energy Efficiency Center. We often meet at our friends’ birthday parties.

— Do you have a hobby?

D.F.: Earlier I was fond of fishing. Now I do it less often. Sometimes I go fishing with my father if I can wake up at four or five a.m. on Saturday. I like driving, but currently I rarely have an opportunity to steer a car myself.

Besides, we have rather young and very pleasant (at least for me) staff at work. We play football in an ordinary small hall on Tuesday evenings. Sometimes funny things happen: my subordinate broke former CEO’s leg (the CEO also played). Now this subordinate works at my company. I also tore a ligament not long ago when I was playing football. But in general, it is funny and sporty.

— Evgeny, and what about your leisure?

E.F.: I have had two small hobbies in Irkutsk, alpine skiing and tennis. Anyway, Irkutsk is much more convenient and pleasant city than Moscow. It takes me four minutes to arrive for work by car and ten minutes if I walk. And in Moscow you have to spend at least two hours on it. Besides, the nature is good there. From this point of view, Irkutsk is much more suitable for healthy way of life.

— Don’t you want to change places? You will come back to Moscow and Denis will return to Irkutsk?

E.F.: No.

D.F.: Me too. I am divorced and my child is here. If I move to Irkutsk, I will not be able to see it.

— Are you a fan of any sport team?

D.F.: I have been a fan of Zenit Football club and SKA Hockey club (St.Petersburg) since childhood. I don’t know why, for I lived in Kaluga. I am not the fan of SKA now. Sometimes I watch the matches and worry about it, but I don’t understand why they always lose having such a team. I am still a fan of Zenit and sometimes visit away matches. In general, I like football very much. I have recently visited the Real-Barcelona match. I went there because I thought that it was the last match with these coaches and teams. I am more a fan of José Mourinho than of Real itself. I was wearing a Barcelona scarf at the Barcelona stadium, for one simply cannot wear any other scarves there. It is almost the same as one enters the Spartak terraces wearing the Zenit scarf. I enjoyed it very much, Real won that time.

Recently I have visited the World Hockey Championship, the semi-final and final. I could not speak for three or four days after that. The semi-final match with the Finnish team cannot be compared even to any El Clásico. The atmosphere was wonderful there. And also I was astonished by benevolence. Both Slovaks and Finns wished each other good luck and embraced before and after the match, and there was absolutely no aggression. And not so many people were drunk. I feel appalled and indignant about what is happening in Poland. For these are sport, pleasure, adrenaline and emotions. And certain people turn it into an almost political massacre. Idiots.

BUSINESS

— Victor Vekselberg, the head of Renova Group, has recently stated that the negotiations with Gazprom on selling IES Holding continue…

D.F.: Negotiations are in progress. Being “stubborn” and “draining” IES from 25% to 18, 12, 8 or 6%, for example, is not an end in itself. We are making an attempt to bring the approaches to real estimate together. We have competent and smart consultants; the best ones in the world, for we cooperate with PricewaterhouseCoopers. Primary data are the main issue. First of all, how the tariffs on electricity and heat will increase. And the “economy” of Gazprom-Energoholding is due to this. We are trying to bring these primary data together to obtain the same figures. Will there be RAB for heat and for what period: five or seven years? Are government agencies ready for a considerable increase in tariffs on heat in certain regions where it is really necessary to upgrade the existing heat supply systems? Of course, IES’s arguments that tariffs on heat in the Urals region tend to increase more rapidly than in Moscow are undoubtedly reasoned. If we compare the tariffs in Moscow and somewhere in the Urals region, there is a world of difference between them. Growth potential is the only issue, and all this greatly affects the final figures. If we successfully bring together the positions on primary data, we will be able to assess the transaction correctly.

We have heard the position of the Federal Antimonopoly Service, they are strongly against. We are preparing new documents: one may be either for or against, but all this should be reasoned. In our opinion, the merger of Gazprom-Energoholding and IES itself can by no means be prevented. We “breach” the established generating concentration standard of 20% in only one free power transfer zone, and only until 2015-2016. And now antimonopoly service workers say that they are ready to revise the acquisition of OGK and other assets by Gazprom-Energoholding and Mosenergo: the dominance of Gazprom Energoholding allegedly has not been approved in Moscow, St. Petersburg, etc. I think it is practically impossible, i.e. the decision to revise the order for acquiring these assets which is five years old will be very “strong”. I do not know how lawful it is; I think only the court can solve this problem. But we perfectly understand how these actions of the regulatory body will influence the country’s investment climate. One can simply revise behavioral or structural constraints. This cannot be done categorically. And we have already worked under the legal terms set by the Antimonopoly Service for a few years. We had no serious problems during this period.

— Are you ready to be in litigation with antimonopoly service workers?

D.F.: In my opinion, reference to the court shows that the work is inefficient and the parties are not ready to listen to each other and cannot reach an agreement. Therefore, of course, it is necessary to reach agreements and consider the position and the apprehensions set out by managers of the Ministry of Economic Development and the Federal Antimonopoly Service. But here I would like to emphasize that settling such issues should also involve people from relevant ministries, such as the Russian Ministry of Energy, the Market Council, etc.

— In your opinion, what key problems does energy market face now?

D.F.: First of all, regulatory bodies actively interfere in price formation process. Nothing good will come of it, as it has not come of it yet. Of course, it is easier to control and keep electricity prices down. But this restrains investment signals, and we do not invest in the necessary facilities, investing in the facilities that probably do not need it, i.e. we receive market signals that may be wrong.

E.F.: These are crazy energy market rules which are extremely difficult to understand. Regulatory documents often contradict each other. Heat supply faces another problem: there is heat supply act and no by-laws. There are too many regulations in the sphere of electricity which are too controversial, while in the sphere of heat supply they are actually absent. Long-term development necessary for both producers and consumers of energy is not stipulated. The Prime Minister has said, “The tariffs have increased considerably”. After this, ministries often do not try to analyze the reasons why prices for electricity grow so rapidly. They try to “invent” the regulations that would “cut” generating companies, mains or marketing instead. Let us count the regulations necessary for “cutting” generating companies, mains or marketing. And vice versa: there are no funds for upgrading, so let us pass another by-law. As a result, all these things overlap each other. A common idea of the ultimate aim is necessary. A new target wholesale and retail market model was being developed, but it has resulted in nothing. We need political will to establish the rules and not to change them for at least five years. The question is how we understand the aim: whether we will have one or two products in the market, energy and capacity.

— Has the community recently renewed the discussion of the idea to create a single settlement system in power industry?

D.F.: This is the right decision. We have difficulties in a number of regions and often face the situation when people had paid for services, but we did not receive the payments. If the cash flow bypasses management companies, I will be all for it because it is impossible to make these companies return the cash. How should it be implemented? I would suggest using the method in a pilot region to see how it works and then proceed with it.

E.F.: I am totally against it. They are trying to solve the problem of management companies’ failures to pay by creating a certain financial settlements center in Moscow. To my mind, it is absolutely wrong. Management companies really go bankrupt every other year. A table, a pen and huge debts owed to resource suppliers are all they have on their balance sheets. But this problem cannot be solved by simply transferring funds to the capital. Each region should have a payment processing center which bypasses management companies and transfers funds to energy companies in the due amount. Why taking cash away from marketing companies that have just began to operate? They are interested in collecting payments and giving them to the All-Russian Bank for Reconstruction and Development (VBRR).

D.F.As I know, there is no VBRR at all. They have chosen the pool of banks such as Gazprombank, Sberbank and VTB, for they have the largest number of branches. Gregory Kurtzer, the head of VBRR, has really headed this team in the government, but it is planned to create the pool comprising the largest banks. It is also planned to create regional PPCs (payment processing centres – RBC Daily) based on them and then to centralize everything. It was the pool of large banks with a vast number of branches that were discussed at all government committee meetings which I have attended.

E.F.: As for marketing, we currently collect 98%. But the people who do this are really greatly interested in it. With all due respect, I would not like my performance to be assessed in Khakassia, Tuva, Moscow Region or elsewhere. They understand that I would like to see their performance. And how should it be assessed if the arithmetic mean is calculated based on the whole sum? Therefore, marketing companies are not actually interested in collecting cash at all. It depends on the role of banks. If there are only PPC accounts, no problems arise. But there is another idea: these are common collecting centers, and marketing companies are only subcontractors. If we collect almost 100% in Moscow and Tyumen, why should a marketing company pay its own cash for the regions where much less funds are collected?

D.F.: I have no problems in Surgut, for instance. But Murmanskaya CHPP causes them. Its debts exceed the gross revenue, RUB 4.5 bln a year and RUB 4 bln, respectively.

E.F.: I would not like to pay for Murmanskaya CHPP.

D.F.: I think we have different information on the same document. And this is one of the key problems. Sometimes regulatory bodies do not even ask us. They just create a document, and we see it only after it has already been signed. I think this is wrong.

— What is your idea of new capacities construction prospects after 2017, when all projects under highly profitable capacity supply contracts (CSCs) will be implemented? It does not concern EuroSib, for they do not construct anything under CSCs.

D.F.: Under current market conditions, there are no prospects of developing generating companies. If we do not change the investment climate in the power industry, no one will construct anything. There will be something like this in the future: everyone will have constructed under CSCs, and the rest of funds will be invested in old capacity. In the medium term, its technical condition will become extremely bad, irrespective of what the System Operator and the Russian Ministry of Energy wish. Therefore, it is vital to immediately adopt a modernization program. But maintaining old capacities must not be an end in itself. For instance, we are constructing a new power generating unit with the capacity of 600 MW at Troitskaya SDPP. The construction of power distribution scheme costs RUB 10 bln. Besides, there is worn-out and obsolete equipment in a bad technical condition. About RUB 10 bln are also necessary to fully upgrade it. It means that a consumer will “suffer” from the standard CAPEX on the power generating unit, as well as from the cost of power distribution scheme and upgrading old equipment. It would be better to decommission worn-out equipment in this situation. In this case, we will stop the construction of additional electrical grids and consumers will pay less. To my mind, the best solution is the following: there will be a new power generating unit within the power distribution panel, but the tariffs will not increase rapidly. However, my attempts to decommission the equipment are always met with groundless refusal. It is like talking to a brick wall. Ezhi Letz said, “Why do you knock the wall with your head? Even if you breach it, what will you do in another room?” And we have breached this wall. In general, the Ministry of Energy seemed to be ready to make a decision after we had toiled for a year because of this unit. This is why the decisions should be rational and informed, considering all factors. I would like to repeat: I don’t believe that there are people who are ready to invest in constructing new capacities (not under CSCs – RBC Daily), taking into account the current tariffs, except for some individual projects. I believe much more firmly that big business will develop its own generating capacities due to such uncertainty. No doubt that the tariffs are important for them, but it is even more important to forecast their level in the long term.

E.F.: I think many consumers are seriously considering the construction of their own generating capacities now, namely for our enterprises with uninterrupted production cycle and high heat consumption. We also understand that we may construct a generating capacity. But it may have an adverse effect. Actually, we have two alternatives: either there will be a certain market signal, total liberalization and introduction of a certain “marked CSC”, or manual “steering” after 2015, when the main new capacities will be commissioned. But the decision should be made this year, otherwise it will be late.

— But you are ready to construct for some reason, aren’t you?

E.F.: We are ready to construct. But it is more the exception rather than the rule because there are consumers that need specific capacities.

— What is your opinion on unifying grids in the form of merger between FGC and IDGC planned by the government?

D.F.: The President and the Prime Minister have already made the decision. The discussion has ended, and the decision is to be executed by authorized persons.

Å.F.: My attitude towards the issue is entirely negative. In my opinion, the key problem of possibly balancing electric power industry by constructing one’s own capacities is currently really related to IDGC. To my mind, the initial privatization strategy for grid distribution facility was really good. And I hope sincerely that its implementation will continue. I have not heard any statements about the fact that, for example, IDGC is not going to be involved in privatization. I hope that it will at least be discussed and after that a decision on gradually privatizing grid distribution facilities will be made.

— Do you own shares in your companies?

E.F.: I personally don’t own them on principle, for anyway this is a certain inside, and I don’t want to use it. But as for the shares of undervalued companies, the value of Irkutskenergo‘s shares can be increased at least twice, in my opinion. If I leave this company one day, I will acquire its securities. At present, I also don’t own securities of other energy companies. In 2008—2009, I was successful enough, but then I practically stopped going it. Currently, I trade a little, “just for pleasure”, but it is not related to power industry.

D.F.: I own shares in Gazprom, OGK-2, Mosenergo and several oil companies. It is a normal way of investing and normal practice. I don’t sell securities, I only acquire them. Why shouldn’t I do it? It’s common practice showing that I am ready to invest my own money. When I am dismissed, then maybe I will sell them.

E.F.: Besides, there will be something to fill the declaration for the Ministry of Energy with….

D.F.: Yes. In my opinion, the code of business ethics for heads of state-owned companies should be immediately adopted. Also the Labour Code should be amended, enabling to process personal data of senior managers, their relatives, etc., i.e. all this should work as a system. But the presumption of innocence must remain the key factor.

— Are you ready to leave power industry in the future?

D.F.: We had studied it and worked for it. So it would be stupid to start producing chocolate now, for instance. I am ignorant in this subject, so I will look ridiculous. Sometimes people who lack the knowledge of power industry come to us, and it is funny enough.